Autohome Inc. annual report, Q4 FY2018

Autohome Inc. Form 20-F Summary

Reporting period: Fiscal year ended December 31, 2018. The filing is an annual Form 20-F and does not provide a clearly separate fourth-quarter 2018 financial statement. Financial statements are prepared under U.S. GAAP, with amounts primarily denominated in RMB; U.S. dollar translations use RMB6.8755 per US$1.

Business Context

Autohome operates China-focused automotive websites and mobile applications, providing media and advertising services, dealer leads generation, online new- and used-vehicle transaction facilitation, auto-financing and insurance brokerage services, and data products. The company is shifting from a content-led media model toward a broader automotive ecosystem encompassing auto-content, auto-transaction, auto-finance and auto-lifestyle.

Mobile websites and the primary application had 29.1 million combined average daily unique visitors in December 2018, up approximately 10% year over year.
Registered users exceeded 90.7 million, up 54.7% year over year.
The company served 103 automakers and 28,613 dealers during 2018.
Ping An Insurance (Group) Company of China, through Yun Chen Capital Cayman, controlled approximately 52.2% of voting rights as of March 31, 2019.

Financial Performance and Position

Metric	2018	2017	Change
Net revenue	RMB7,233.2 million (US$1,052.0 million)	RMB5,647.3 million under comparable ASC 606 presentation	+28.1%
Gross profit	RMB6,412.9 million	RMB4,641.3 million	+38.2%
Gross margin	88.7%	82.2%	+6.5 percentage points
Operating profit	RMB2,868.9 million	RMB2,051.8 million	+39.8%
Operating margin	39.7%	36.3%	+3.4 percentage points
Net income attributable to Autohome	RMB2,871.0 million (US$417.6 million)	RMB2,001.6 million	+43.4%
Net margin attributable to Autohome	39.7%	35.4%	+4.3 percentage points
Diluted EPS	RMB24.08 (US$3.50)	RMB16.95	+42.1%
Net cash from operating activities	RMB3,111.4 million (US$452.5 million)	RMB2,463.7 million	+26.3%

Revenue Mix

Media services: RMB3,508.3 million, or 48.5% of revenue, up 21.3%. Average revenue per automaker advertiser rose 18.9% to RMB34.1 million.
Leads generation services: RMB2,871.0 million, or 39.7% of revenue, up 25.5%. Average revenue per paying dealer increased 19.1% to RMB100.3 thousand.
Online marketplace and other services: RMB853.9 million, or 11.8% of revenue, up 83.0%. Excluding 2017 direct vehicle sales, the filing states that this category increased 429.4%.

Cash, Liquidity and Debt

Cash, restricted cash and short-term investments totaled approximately RMB10.1 billion at December 31, 2018, including RMB9.85 billion of short-term investments, RMB212.0 million of cash and cash equivalents, and RMB5.0 million of restricted cash.
Total current assets were RMB13.14 billion versus current liabilities of RMB4.16 billion. Accounts receivable increased to RMB2.80 billion from RMB1.89 billion.
Total liabilities were RMB4.64 billion and total equity was RMB11.11 billion. The filing does not present a material borrowings or debt balance; “capitalization and indebtedness” is marked not applicable.
Management stated that existing cash and expected operating cash flow should meet anticipated needs for at least the next 12 months.
Net cash used in investing activities was RMB3.30 billion, primarily reflecting purchases of deposits and financial products, the TTP convertible bond investment and capital expenditures.
Net cash used in financing activities was RMB544.0 million, primarily the payment of the special dividend declared in 2017 and paid in January 2018.

Material Changes Versus the Prior Comparable Period

Revenue growth accelerated substantially, driven by higher automaker advertising, dealer monetization, and expansion of auto-finance, data products and transaction-facilitation services.
Gross and operating margins improved primarily because direct vehicle sales were discontinued and vehicle-related cost of sales declined to nil in 2018.
Sales and marketing expense increased 47.8% to RMB2.44 billion, rising to 33.6% of revenue from 29.2%. Product development expense increased 29.2% to RMB1.14 billion.
Operating cash flow increased, but accounts receivable rose RMB904.3 million, creating a significant working-capital use.
The company adopted ASC 606 using the modified retrospective method. The principal effect was presenting VAT net rather than gross; the change affected classification, not operating profit, net income, balance sheet or cash flow.
In June 2018, Autohome invested US$100 million in an 8% three-year convertible bond issued by TTP Car Inc. The investment was recorded as an other non-current asset, with a separate warrant valued at RMB36.4 million at year-end.
Revenue from Ping An Group and its affiliates increased to RMB473.5 million from RMB21.2 million in 2017, while services purchased from Ping An increased to RMB88.7 million.

Guidance, Outlook, Commentary and Risks

The filing does not provide quantitative revenue or earnings guidance. Management’s stated strategy is to continue building an integrated automotive ecosystem, expand mobile services, strengthen media and leads-generation businesses, develop used-vehicle transaction and auto-finance activities, and commercialize data-driven products.

China’s automobile industry contracted in 2018 for the first time in approximately 28 years. Lower vehicle sales, weaker consumer confidence, trade tensions, purchase-tax changes, emissions rules, license-plate restrictions and tighter auto-loan regulation could reduce advertiser and dealer spending.
Revenue is concentrated in the automotive advertising and dealer ecosystem. The top five automaker advertisers represented 22.2% of media services revenue in 2018, and third-party advertising agencies remain important for sales and collections.
The asset-light transaction strategy and newer auto-finance, insurance, used-car and data businesses have limited operating histories and may require continuing investment without predictable returns.
The company relies on PRC variable interest entities to operate restricted internet-content businesses. Regulatory changes or challenges to the VIE contracts could restrict operations, impair consolidation, or result in penalties, license loss or restructuring.
PRC foreign-exchange controls, limits on distributions from subsidiaries and statutory reserve requirements restrict the transfer of cash to the Cayman Islands holding company. Restricted net assets of PRC subsidiaries and VIEs were RMB9.75 billion at year-end.
Data privacy, cybersecurity, advertising, e-commerce, online-content, insurance brokerage and internet licensing requirements are evolving and may increase compliance costs or expose the company to sanctions.
Ping An’s controlling ownership makes Autohome a controlled company; the company relies on NYSE exemptions from certain independent-board and committee requirements.
The company had no material pending legal proceedings according to management, no financial guarantees or material off-balance-sheet financing arrangements, and reported effective disclosure controls and internal control over financial reporting.
No additional cash dividends were planned in the foreseeable future; future dividends remain subject to board discretion, cash flows, capital needs and PRC distribution restrictions.

Investor Verification Checklist

Reconcile 2017 comparables under ASC 606, since reported 2017 revenue in the selected financial data differs from the comparable net-of-VAT figures used in management’s analysis.
Assess the collectability and aging of the RMB2.80 billion accounts receivable, including reliance on advertising agencies and concentrated customers.
Review the terms, valuation, conversion conditions and credit risk of the US$100 million TTP convertible bond and the additional US$65 million investment right.
Monitor whether growth in auto-finance, insurance, used-car transactions and data products offsets any slowdown in core automotive advertising.
Evaluate the sustainability of the 2018 margin expansion after excluding discontinued direct vehicle sales and considering elevated marketing and product-development spending.
Review VIE contractual arrangements, PRC licensing status, the Foreign Investment Law, E-commerce Law and evolving data-security requirements.
Verify the economic significance and arm’s-length terms of transactions with Ping An Group, including RMB473.5 million of 2018 revenue.
Confirm cash accessibility at the offshore parent level given RMB9.75 billion of restricted PRC subsidiary and VIE net assets and foreign-exchange controls.